Retail and consumer insights: Virtual fireside chat with sector experts

Mounting Cost Pressures

The UK retail and consumer sector enters 2026 amid a precarious balance: early signs of consumer spending recovery clash with intensifying operational costs, particularly in labour. Recent policy changes under the Labour government, including an increase in employer National Insurance contributions from 13.8% to 15% and a lowered earnings threshold, combined with further National Living Wage rises, have imposed significant new burdens on retailers, who operate on thin margins and face limited ability to pass costs to price-sensitive shoppers.

These labour cost fears have surged, with surveys showing a sharp deterioration in sentiment among retail CFOs. Many now anticipate reducing hours, freezing recruitment, or cutting jobs outright, particularly in head offices and stores. This comes against a backdrop of subdued consumer confidence, where worries over groceries, utilities, and job security continue to curb discretionary spending, even as inflation eases somewhat.

Recent data offers a mixed picture: retail sales volumes rose strongly in January 2026, driven partly by non-food categories and online channels, suggesting some pent-up demand release after interest rate cuts. Yet broader forecasts point to cautious, value-driven behaviour persisting, with households prioritising essentials and scrutinising every pound. This dynamic heightens competition for share in a slow-growth environment, while regulatory scrutiny in areas like pricing and competition adds further complexity.

A key tension lies in the trade-off between short-term cost-cutting—often through workforce reductions—and longer-term resilience. Retailers trimming staff risk damaging service quality and customer experience at a time when shoppers increasingly value convenience, personalisation, and trust. Meanwhile, inaction on costs could erode profitability further, especially amid ongoing geopolitical supply risks and potential trade disruptions whose full effects may unfold this year.